Iceland: Recession continues
The recession into which the Icelandic economy fell following the failure of the country’s three main banks in October 2008 continues. Domestic demand has fallen sharply, and the economy is projected to continue shrinking until early 2010. Thereafter, growth is projected to return, boosted initially by the expected normalisation of financial conditions and subsequently by investment in large energy-related projects. The unemployment rate is likely to rise to around 7% by mid-2010 and edge down thereafter. The government programme will help to narrow economic imbalances, with inflation falling to about 2.5% by 2011 and the current account deficit declining to 1.5% of GDP in 2011.
It is vital that the planned fiscal consolidation programme be fully implemented so as to put public finances back on a sustainable path. Monetary policy should remain focussed on exchange rate stability and capital controls should be progressively removed as soon as feasible to normalise relations with foreign markets and allow firms to access foreign credit markets.
©OECD Observer 2010